Understanding the ownership structure of your business is essential to form a Limited Liability Company correctly. The business owners of an LLC are called members. The members of your LLC will need to be identified in your articles of organization, which is the paperwork required to form an LLC with the Secretary of State (or similarly named state department). After filing the articles, to best protect your business and personal assets, you may consider creating an operating agreement for your LLC, which should identify the members along with the rights and responsibilities of each person.
What is a Limited Liability Company?
An LLC is a business entity that is different from a sole proprietorship or general partnership as it separates the owner’s personal and business assets. Having a separate legal entity provides liability protection for the owner’s personal assets if the company faces legal action in addition to some potential tax advantages and a flexible management structure.
Forming an LLC means filing the Articles of Organization (called Certificate of Organization or Certificate of Formation in some states) and paying the state filing fee. This creates a new legal entity that is separate from its owners.
Read more about what forming an LLC can protect your personal assets.
How many members can an LLC have?
LLCs must have at least one member (called shareholders in a corporation), but there is usually no restriction on the maximum number of members unless the entity elects to be taxed as an S-Corporation. If an LLC elects to be taxed as an S-Corporation (often called an S-Corp), which is a federal tax election with the Internal Revenue Service made by filing IRS Form 2553, membership is limited to 100 members. This election may lower the member’s personal tax liability, but not in all cases.
Who can be a member of an LLC?
Many states do not impose limitations on who may be members of an LLC. In most states, LLC members must be at least 18 years old, but there is no citizenship requirement. In fact, entities, such as trusts, corporations, or other LLCs, can also operate as members of an LLC.
As LLC owners, members can stipulate the extent of their involvement in the management of the LLC. Small business owners with a more hands-on role in the day-to-day management of the company will take on such tasks as negotiating and executing contracts and supervising company employees (known as a member-managed LLC). Members may also be investors only and choose not to handle any of the day-to-day responsibilities and hire a manager to operate the business (known as a manager-managed LLC).
Single Member LLCs vs. Multiple Member LLCs
A single-member LLC has only one member (owner) and is solely controlled by this member. A multi-member LLC has two or more members who all share control of the company. While most important for a multi-member LLC business structure, you should have an operating agreement in place, even though it’s not required in most states. If you establish a multi-member structure, this agreement is used to document particular instructions for handling important events throughout the life of the LLC, such as a member’s death or withdrawal, dissolution of the company, and resolution for disagreement between members.
How to change a Single-Member LLC to a Multiple-Member LLC
Should you create an operating agreement?
An operating agreement is basically a legal framework for the internal operations of the Limited Liability Company. Many states don’t require an operating agreement, however, an LLC with multiple members should strongly consider it to avoid costly legal trouble should the LLC members have a disagreement. The Operating Agreement will contain rules for capital contributions, voting rights, the process for bringing in new members, distribution of profits, etc.
Related: What is an operating agreement